FOMC Minutes, Record Highs for Dow and S&P, Dollar Woes, a Silver Play, and More!

by Addison Wiggin & Ian Mathias

  • Fed minutes released… is an October rate cut in the cards?
  • Traders think so… markets crest all-time highs, dollar back in the dumps
  • Gold is back in form… a precious metals wrap-up, plus a unique silver play
  • Housing crisis so bad that you can’t afford to sell your home? Chicagoans in dire straits
  • How the dollar is suffocating GCC nations… and how GCC nations could strike back
  • Diet stocks go bulimic… how a seasonal sell-off could spell profits in 2008

 

“Given the unusual nature of the current financial shock,” reads the minutes from the Fed’s now infamous Sept. 13 meeting, “participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside.”

Translation: “The subprime mess is bigger than we expected. And we’re scared it’s going to bugger the economy at large.”

Bernanke and crew go on to say: “The impaired functioning of financial markets might persist for some time or possibly worsen, with negative implications for economic activity. In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action.”

Or if they were speaking in English: “What’s more, it ain’t over yet. So we’re going to make money cheap again. Maybe that will get us out of the woods.”

On the subject of “inflation” — that pesky little word that used to be the Fed’s “predominant concern” — the Fed governors “were a little more confident that the decline in inflation earlier this year would be sustained.”

Hmmn… now that the rate cut has pushed the dollar to all-time lows against basically every major currency, we wonder if the Fed is now a “little more” concerned.

Wall Street interpreted the FOMC minutes as bullish for stocks. The “bad news is good news” mantra is alive and well, apparently.

The market interpretation of the Fed minutes goes something like this: The Fed is both concerned that the credit crisis will slow the economy down and unanimously in favor of using rate cuts to ease the pain. Using a combination of quantitative analysis, tea leaves, bar charts and cocaine, traders came to believe an October rate cut could be in the cards, and started to buy.

The Dow rallied 0.8%, to 14,164 — an all-time high. The S&P followed suit up 0.8% as well, to a record high of its own. The Nasdaq also continued its recent comeback up to 2,803 — its highest since January 2001.

But at the same time, economists are getting increasingly nervous about a housing-inspired recession.
Greenspan gives a recession 50-50 odds. And David Wyss, chief economist of S&P, doesn’t expect housing prices to hit bottom until next summer, “and the losses won’t peak for another two years, until 2009.”

“We are not halfway through this crisis yet,” Wyss told the NY Post this morning. S&P expects the U.S. economy to grow 2% this year and next. Meanwhile, the global economy, it says, will grow 3.6% this year and 3.5% in 2008.

Yet another mortgage lender has bared all. Thornburg Mortgage said this morning its subprime losses will be 27% higher than expected. Thornburg will throw another $1.1 billion on the mortgage carcass pyre.

Home sellers around the nation are struggling to afford the sale of their homes.
“It seems that for those homeowners on the margins — those with some, but not much equity — the costs of a real estate transaction are turning into a kick in the pants,” reports the Chicago Tribune.

Home sellers that have financed 90-100% of their homes are counting on selling their house for more than the purchase price… uh-oh. Real estate agents in Chicago claim insurance fees, legal costs, taxes and commissions are putting those sellers deep in the hole… so much that many are bailing out of transactions.

“If you’re listing a house for $410,000 and the mortgage is $390,000, you’ve got a problem,” said an anonymous real estate agent. No kidding…

Heating your home this winter is going to be more expensive.
The Department of Energy released a report this morning with the following forecasts:

  • Heating oil up to 22% this year
  • Propane up 16%
  • Natural gas up 10%
  • Electricity up 4%.

Food prices, too, are at their highest rate of inflation since 1990.
John Lonski, chief economist of Moody’s Investor Service, said, “While high food prices can cut into consumers’ discretionary spending, the 4% rate of food inflation is still far below the crippling double-digit levels of the 1970s.”

Still, citing housing, energy and food prices, more Americans now rate the economy as their biggest concern than in July.
An AP poll released this morning says 15% of middle class and 22% of working-class folks see the economy as the U.S.’s biggest challenge this fall. That’s up 6% from July.

40% of consumers, 10% more than last year, claim they won’t begin shopping for Christmas until after Thanksgiving,
says a study published by NPD, a consumer research group. Retailers around the country are already cutting prices and hanging up the jingle bells for their most profitable season.

Wal-Mart, for example, reduced holiday toy prices by 50% last week. But according to NPD, consumers aren’t taking the bait this year. Not yet, anyway. We suspect it won’t be long before the plastic comes out and consumers load on debt in the true American holiday spirit.

Not surprisingly, the dollar abruptly ended its rally yesterday.
The euro climbed back into the $1.41 range, and the pound sprung back to $2.04.

Since the U.S. Federal Reserve cut short-term interest rates on Sept. 18, the dollar has shed almost 2% of its “trade weighted” value.

“The weakening U.S. dollar continues to weigh heavily on the dollar-pegged currencies here in the Gulf,” reports Joel Bowman from Dubai. “As a direct result, Gulf Cooperation Council countries have experienced greater inflationary pressures and a sizable reduction in purchasing power, especially when importing from the eurozone.”

Currently, the dirham is pegged to the U.S. dollar at a rate of 3.6 dirhams per dollar. Which means from 2002-2007, the dirham lost 28% of its value against the euro. For a nation that sources roughly 26% of its total imports from the eurozone, currency depreciation is a serious issue. By contrast, only 12% of the United Arab Emirates’ imports come from the U.S.

Five of the six GCC countries retain their peg to the U.S. dollar. Only Kuwait, which decoupled in May of this year, is aligned with a basket of other currencies. Since Kuwait abandoned its dollar pegging, its currency, the dinar, has risen 3.1% against the greenback.

Since 2002, the average inflation for oil-exporting countries in the Middle East has risen from just 0.1% to 6.5% this year.
In Qatar and the United Arab Emirates, it’s worse. Their inflation rates are running 11.8% and 10.1%, respectively.

“As oil continues to set record highs,” says Joel, “the abundance of petrodollars flooding the Middle East will only exacerbate the problem. The UAE, in particular, is exposed to downward currency fluctuations of the greenback.”

“There is no official GCC plan to abandon the U.S. dollar before 2010,” Joel points out, “but the pressure to do so is increasing.” We’ll keep you posted…

Our favorite resource currencies, the Canadian loonie and the Aussie dollar, pushed back to $1.02 and 90 cents respectively.
The loonie continues to push deeper into its 31-year high. The Aussie is just off its 23-year high against the U.S. dollar.

The Singapore dollar is at a 10-year high this morning.

“Normally,” explains EverBank’s Chuck Butler, “we would see the Sing dollar rise and then fall, because the central bank would intervene to keep the currency as weak as yen and renminbi. It’s all a competition game for exports! But recently, the central bank has not intervened.

“Have they experienced a life-changing event? Nah… The renminbi has gained about 10% in the past year, so the Singaporeans have decided it’s OK to allow their currency to rise. The Monetary Authority of Singapore, which controls the exchange rate, says that It is going to allow the currency a “gradual and modest” appreciation to keep inflation at bay.”


You can expect more “appreciation” for the Sing dollar to come.
Oil prices have held steady at $80 since the Fed’s September cut.
But that may not last. According to the Energy Dept., global demand of oil will be 1.8 million barrels a day higher in the last quarter of 2007 than at the same time last year.

October rate cut expectations successfully ended gold’s slump, as well.
The metal had been resisting falling below $730. But since the FOMC release, gold has shot back as high as $745.

Silver, too, showed some moxie… the multitasking metal has rallied hard since sell-offs in August. Prices are up to $13.64 since the summer low $11.67, reached on Aug. 21. EverBank, by the way, offers a MarketSafe Silver CD – a great way to play silver’s possible rise without subjecting yourself to market risk. If you’re interested, get a hold of them soon… we hear the funding deadline is just around the corner. Click here to learn more.

The coming holiday seasons could be the death of your latest diet, as well as a time to pick up some depressed diet industry stocks.
“With baseball playoffs, Halloween candy and Thanksgiving feasts just around the corner,” reports The Growth Stock Wire’s Jeff Clark, “it’s nice to not have to face the pressure of a strict dieting regimen.

“Well, ‘nice,’ that is, unless you’re in the business of selling diet regimens. Look at what happened to NutriSystem shareholders last week…

“Shares of NutriSystem were crushed when the company announced preliminary earnings that were way below analysts’ expectations. Management blamed the shortfall on increased competition from GlaxoSmithKline’s new weight-loss drug, Alli. But something more basic is going on…

“No one wants to be on a diet during the fall. NutriSystem’s troubles have very little to do with the competitive pressures of a new diet pill… and everything to do with seasonality. Indeed, the stock disappointed investors during the third quarter last year as well.

“Don’t be too surprised to see a similar disappointment out of Weight Watchers when it announces earnings in a few weeks. But bargain hunters should be ready to pounce. Any weakness in the diet stocks is likely to be temporary. After all, we’re just a couple of months away from making our New Year’s resolutions.”

Regards,

Addison Wiggin,
The 5 Min. Forecast

rspertzel

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